Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
The British economy is clearly declining and the Government has moved from denying the decline (it initially spent months talking up its claims that austerity would promote growth) to admitting the decline but diverting the blame to others. The others in this case – are the hopeless Europeans who move from one disaster to another. So now the narrative that is emerging in Britain is that its export-led recovery plans are being damaged by the failure of the Europeans to do something about the crisis there. There are two ways of thinking about that. If Europe was such a problem then it has been a problem for nearly 4 years and so it was misguided to deliberately damage domestic growth (via austerity). The other way to look at it is to note that the British economy has resumed growth under the support of the fiscal stimulus (introduced by the previous government) and then started to experience declining growth virtually from the day the current British government announced its scorched earth policy cutbacks. The recent Euro crisis has really nothing to do with that. It is clear that the British government is moving from denial to blame shifting.
Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
When a democratic government fails to deliver on its promises it typically gets tossed out of office by the voters at the next election. Sometimes it takes a few elections for the rot to set in once it becomes clear that the strategy for the nation is not working. Yesterday, the European Union put out its – European Economic Forecast – Autumn 2011 – which categorically demonstrates that after 3 years of crisis and one grand plan after another the leadership is failing. Some of the leadership tokens – the Greek and Italian prime ministers have been pushed aside – but not by the people – rather by the cabal that rules Europe. The situation will worsen while this lot hold the power.
The Australian Bureau of Statistics (ABS) published the Labour Force data for October 2011 today. The data shows that employment barely grew and thanks to an artificially low labour force growth rate was just sufficient to allow unemployment to fall slightly. However, most of the drop in unemployment was due to a slight decline in the participation rate. The data is not bad but it is certainly not good and points to a weak economy overall. How long that remains is anyone’s guess in these uncertain times where governments have largely abandoned any plans to provide fiscal support to help the economies grow. The recent acceleration of the crisis in Europe should not impact negatively on our labour market if the Government is flexible enough to abandon its obsessive pursuit of a budget surplus. The black spot in the data today is the continued deterioration of the youth labour market. That should be a policy priority but unfortunately the government is largely silent on that issue. Overall, the Australian labour market is just staggering along.
The International Labour Organisation (ILO) released their updated this week (October 19, 2011) – Global Employment Trends for Youth: 2011 Update – which reminds us of how long the current policy failures will continue to generate negative consequences. That is, the world will be enduring the costs of the policy failures for decades to come by denying our youth the opportunity to fully participate in the economy. The increasing incapacity of our economies to provide sufficient work in hours and quality to meet the requirements of our youth is one of the major characteristics of the neo-liberal era. It is a deliberate, policy-induced outcome – that is, governments are squarely to blame for the malaise. At a time when neo-liberals use rising dependency ratios to justify their attacks on budget deficits but then fail to realise that our unemployed youth are a major casualty of the fiscal austerity – that is, our future workforce. The scourge of youth unemployment is condemning our future workers to a low-wage, unstable and productive employment history.
I did an interview in August with the Harvard International Review (published by Harvard University). It was finally published yesterday (October 16, 2011) – Debt, Deficits, and Modern Monetary Theory. I consider the principles that are outlined in that interview to provide a sound organising framework for progressive movements aiming to make changes to the current failed systems. I think Modern Monetary Theory (MMT) does provide insights to the general population that are not only obscured by the mainstream media but which if they are broadly understand will empower the 99% to demand governments redefine their roles with respect to the non-government sector. Part of that re-negotiation has to be to reduce unemployment and redistribute national income more equally. We will also be better placed to have a sensible discussion about the human footprint on the planet. The three goals – full employment, reduced inequality and environmental harmony – should be central to the current civic protests (such as OWS). But we also have understand that government has to be involved in the pursuit and maintenance of those goals. The problem is not government but the politicians we elect and the coalition between them and the corporate elites. An understanding of MMT can energise the progressive fight back.
The Australian Bureau of Statistics (ABS) published the Labour Force data for September 2011. It shows that a labour market that has arrested the decline evident in the previous two months but is barely keeping pace with underlying population growth and shedding working hours. The data is not bad but it is certainly not good and points to a weak economy overall. The best I can say about today’s data release is that the labour market is now not accelerating in reverse gear. How long that remains is anyone’s guess in these uncertain times where governments have largely abandoned any plans to provide fiscal support to help the economies grow. Overall, the Australian labour market is very tepid at present with a downward bias.
Sometimes, not often, I read some economic analysis that is sound. In the constant barrage of mainstream economics telling us that budget deficits are causing the crisis to linger; that interest rates are about to rise sharply because there is too much public debt; that inflation is about to go hyper because bank reserves have risen; that taxes will soon sky-rocket to pay back the debt; and all the rest of the lies that students are forced by lecturers around the world to rote learn, to find a well-reasoned piece of analysis is very refreshing. My attack dog propensities subside and I am able to think about what is being written – seeing where I agree and disagree and even learn some things. Such was my experience this morning when I read a new Report from the US-based The Way Forward Moving From the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness. It will not be a case of common sense prevailing because the forces against this type of clear thinking are many and powerful. But it is evidence that views that are not incompatible with Modern Monetary Theory (MMT) are being developed and thrown into the public debate. In this case, the authors also have some public profile. The ideas in this Report would provide a Way Forward.
As the Occupy Wall Street movement grows and is spreading to other cities in the US and other cities around the World, my profession is “feverishly” trying to discover the “financial sector” to plug into their New Keynesian models. The global financial crisis caught them out badly. Now they are fixing that “deficiency” up and we will all be better informed again once the boffins do their work. That is what the Bank of International Settlements is trying to tell us anyway. As usual, the BIS is part of the problem rather than being part of the solution. The OWS movement is a recognition of that and anything the mainstream macroeconomists dish up will only inflame the resistance further. It is becoming clear that more people daily are saying “we will not pay for your crisis”.
It seems my attempt to escape the Lands of Austerity last week unscathed was a pipe dream. I have been slowed over the last days by a European flu of some sort. So I have less energy than usual which doesn’t tell you very much but might explain why I might write less today than on other days. I am also behind in my reading. But I did read a little over the weekend, especially the documents and statements pertaining to the IMF annual meetings, which had the effect of worsening my condition. I also dug out an old 1933 document which helped restore my equanimity. It allows us to frame today’s leadership failure in history.
I am back in the land of semi-austerity and the sun is shining warmly. That is one of the advantages of living in Australia. We have mindless politicians like everywhere else but at least one can luxuriate near the beach in the sun. Let me just say at the outset that I am not against forecasting. I do it myself almost everyday and acknowledge that it is an art rather than a science – in other words forecast errors are par for the course. But a problem arises when ideology drives the forecasting process and that the forecasts are then used to perpetuate that ideology via policy development. If the underlying model of the economy that is reflective of that ideology is indelibly wrong then the policies advocated may damage the economy rather than improve it. The forecast errors will also be a sign that the underlying theory is deficient. That is exactly what occurs when the IMF produces its World Economic Outlook. If you trace the WEO forecasts for the last several years you will see how inaccurate they have been. But that hasn’t stopped the IMF from demanding fiscal austerity which has worsened the crisis. They continue to strut the world stage – bullying and claiming authority. The participating governments should terminate the IMFs tenure immediately by writing to the IMF saying that the first act of fiscal consolidation is to terminate their funding. The organisation serves no useful purpose.
When the Liberal Democrats went into coalition with the British Tories I was surprised how readily and brazenly their leadership was prepared to compromise the underlying principles of the party for power. While the Party Constitution claims they stand for – “a fair, free and open society” balancing “the fundamental values of liberty, equality and community, and in which no-one shall be enslaved by poverty, ignorance or conformity” and “that the role of the state is to enable all citizens to attain these ideals, to contribute fully to their communities and to take part in the decisions which affect their lives” it is clear that they have become partners in a policy regime that is the anathema of those ideals. By entering the coalition they have allowed a pernicious regime to be inflicted on the British people – one which is driving unemployment up and incomes down. The Liberal Democrats are having their Annual Conference this weekend in Birmingham and it is clear if the utterances of some of their members are anything to go by that the Party is struggling with their identity. The Deputy Leader for example said (September 17, 2011) that the job of the Liberal Democrats was “to rein in the ruthless Tories”. The reality is that it is the government that is ruthless and the Liberal Democrats are part of that government and give it the air it needs. I was unfortunate to listen to a BBC interview today with Liberal Democrats leader Nick Clegg and it left me with the impression that there is little to distinguish the coalition partners on the main economic issues. Both parties are infested with neo-liberalism and both fail to understand basic macroeconomics – that spending creates income.
As winter arrived (June 1), the March quarter Australian National Accounts came out and showed that the Australian economy contracted by a staggering 1.2 per cent. With the seasons passing into spring and the warm days are back, the Australian Bureau of Statistics released the National Accounts data for the June 2011 quarter which not only revised last quarter’s result to -0.9 per cent but also showed than in the subsequent three months of this year the Australian economy grew at a robust 1.2 per cent. That means in the last 12 months the economy has grown by 1.4 per cent (a very poor result) but in the second quarter accelerated on the back on household consumption and a strange pickup in inventories. But if the growth continues then I expect some reductions in the unemployment rate by the end of the year – which is a good prospect. The irony is that the external sector continues to drag the growth rate down despite our so-called “once-in-a-hundred-years” mining boom. There are mixed signals in the economy at present though. Remember the National Accounts are a rear-vision view of what was happening in April, May and June. Since then the global economy has gone apoplectic and China is slowing. The most recent Australian data does not accord with the strength indicated in today’s (rear-vision) version of events.
Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
I was reading an interesting study the other day that helps us understand why the macroeconomic policy debate is so awry at present. The paper – Cognitive dissonance, the Global Financial Crisis and the discipline of economics – by Adam Kessler an economist at a Florida university demonstrates that the mainstream economists who are highly influential in the current policy debate suffer from “cognitive dissonance” which leaves them in denial of the facts. CD leads to dysfunctional opinions and if these opinions carry weight in the public debate the policies implemented are also likely to be dysfunctional. It is a sad testimony that the mainstream of my profession is largely operating in a parallel universe but bringing their crazy ideas to our universe and pressuring governments to follow policies that damage a vast majority of people. One thing that is clear – the majority of these economists never have to carry the costs of their denial and retire on nice pensions. The same cannot be said for the victims of their arrogance and denial.
I guess I had to write something about the “compromise” aka cave-in yesterday in the US capital. You can only conclude that the US President wanted this agenda and needed a smokescreen (mad Republicans) to put it in place. There is a lot of evidence that Obama wanted to attack pension and medical entitlements. Now he can. Not for long though – he is a one-term president in the making. When you put all the elements together sometimes compromise is the worst thing.
Today I was reflecting on the role of students in social change. I was a student activist and took that role very seriously when I was a full-time student. I did have a sense of entitlement that it was our future and we had to rock the boat to make it work in the way we wanted. I probably proposed things without fully understanding them – that is the nature of being a student – enthusiasm gets ahead of judgement. But I also was lucky to have a few really great mentors in my earlier days who helped me. It is the role of the mentors and teachers to steer that youthful zeal to develop mature, knowledge-based assessments and informed action. I find my profession to be seriously defective in that sense because they indulge more in propaganda than they do in educating the students who want to learn economics. I do not think the average economics program to be of much educative value. But I understand the conservative nature of my profession and the reasons they behave in that way. What is more objectionable is when a self-styled progressive organisation engages in the same sort of exercise with students yet denies that they are doing it. The problem then is the beautiful enthusiasm of our youth becomes manipulated by their mentors and what should have been an educative process becomes a compromise ideological exercise serving the top-end-of-town. So today – continuing my truth theme – I am writing about processes and organisations that become ineluctably compromised.